Pittsburgh Chapter's annual liaison meeting with the IRS Pittsburgh District; January 26, 1995.

On January 26, 1995, representatives of Tax Executives Institute's Pittsburgh Chapter held their annual liaison meeting with officials of the Internal Revenue Service's Pittsburgh District. The minutes of that meeting are reprinted below. Certain questions and answers have been deleted or edited to take into account superseding events. In particular, the IRS's responses to questions 1, 2, and 3 under the heading Appeals (relating to early referral to Appeals under Announcement 94-41, mediation under Announcement 95-2, and coordination of Appeals' involvement in Competent Authority cases under Announcement 93-144) have been shortened inasmuch as those procedures hate been the subject of previous articles in The Tax Executive.

Examination

1. Status of Advance Determination Procedure.

The National Director of Corporate Examinations, Tom Wilson, is currently reviewing the findings of a task force that was convened to study this issue. We anticipate some guidance to be issued soon.

2. Taxpayer Compliance Measurement Program (TCMP) for 1995-What Will It Mean to Pittsburgh Taxpayers?

The TCMP examinations will begin in October 1995 and will conclude in May 1998. This program will be different from previous TCMP programs because it incorporates the market segmentation strategy the IRS is now using to identify areas of noncompliance within the tax markets and tax classes.

The Pittsburgh District will be examining approximately 2,300 returns out of the 152,500 that will be done nationally. The breakdown of returns by tax class for Pittsburgh is, as follows: Form 1040 1,462 Form 1120 442 Form 1120S 156 Form 1065 223

We understand that CEP partnership cases could be selected under the 1995 TCMP audits, meaning a more indepth audit for those cases selected.

3. Revocation of Record Retention Agreements--What Is the Effect on the Audit Process in Pittsburgh?

Although we (the IRS) are automatically revoking all record retention agreements in CEP cases coming up for audit, there has been no adverse effect on CEP examinations in Pittsburgh. Revenue Procedure-91-59 mandates that all machine sensible records are to be maintained by the taxpayer in addition to hard-copy records. These are records that have a direct impact on the income tax returns. The revenue procedure goes into detail on what files are to be maintained and how they are to be formatted. Our computer audit specialists are available at [phone] to answer questions about Rev. Proc. 91-59.

4. What Is the Status of IRS Approval for Use of Electronic Imaging for Record Retention Purposes?

At the present time it is still a consideration that is being studied by IRS Headquarters in Washington, D.C.

5. Please Comment on New Form 5471 and How It Will Be Helpful in Conducting Audits.

The new Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, which is expected to be released in [early] 1995, will continue to be the backbone of the international examination. Since it contains information relative to Controlled Foreign Corporations, it is essentially the starting point of all international examination cases.

The form is being modified to accommodate the change that now requires a company to report information in the functional currency of the country involved and then convert it to U.S. dollars according to the generally accepted accounting principles (GAAP). There are minor modifications to some other schedules and some, such as Schedule D, have been eliminated.

6. Please Comment on New Developments to Improve the Audit Process (e.g., Procedures to Get More Current and Shorten the Audit Cycle).

Steps we are taking to improve the audit process include

(a) We are getting the taxpayer involved in the audit planning process, which helps to improve the level of understanding and communications between the taxpayer and the IRS.

(b) We are training all Coordinated Examination Program agents in the use of databases in the audit process. With direct access to the taxpayer's database information, we will be able to decrease the time span of the audit as well as reduce the burden of supplying records, data, etc., on the taxpayer.

(c) We are also trying to improve the currency of audits by conducting them in three- year cycles when appropriate.

7. Please Comment on Advance Pricing Agreements (APAs) to Resolve Transfer Pricing Disputes. Also, Comment on Preferred Format for Contemporaneous Documentation for Transfer Pricing Disputes.

APAs are proving to be very helpful in resolving transfer pricing disputes. To date, the National Office has received nearly 100 APAs, and it expects that number to be doubled during 1995. The potential for assessment of the transfer pricing penalty under section 6662(e) has increased the interest in APAs.

According to the new regulations under section 482, there is no preferred format for contemporaneous documentation for transfer pricing. Under the documentation rules, the taxpayer must establish the economic justification for its transfer prices at the time the transfer occurs and must be able to show the IRS how the prices can be defended. The taxpayer must be able to show what efforts it made to determine the accuracy of its transfer pricing. These methods include transfer pricing studies, efforts made to determine "comparability," the completeness and accuracy of available data, and the reliability of assumptions made in establishing the data.

The bottom line is that emphasis should be placed on the quality of the documentation that is used, rather than the quantity. Larger and more sophisticated businesses (taxpayers) should have more specific documentation. Smaller and mid-sized taxpayers should, in effect, be able to show what efforts they made in order establish the accuracy of transfer pricing.

8. Please Comment on IRS-Pittsburgh's Experience with Accelerated Issue Resolution (AIR) under Rev. Proc. 94-67.

We have completed two AIRs in the district and two are in process. We find this process most beneficial to both the IRS and the taxpayer in continuing issues and intend to continue its use in appropriate cases.

9. Please Comment on IRS-Pittsburgh's Experience in the Application of Rev. Proc. 94-68, which Deals with the Situation "Under Which a Case Closed After Examination in the Office of a District Director of Internal Revenue May Be Reopened to Make an Adjustment Unfavorable to the Taxpayer."

We have not yet had an occasion to utilize this in CEP cases in the District.

10. Please Comment on Neece Case and the Right under the Financial Privacy Act with respect to Taxpayers Providing Information on Customers' Credit Histories, etc.

In AOD-CC-1992-013, the IRS issued its nonacquiescence in the Neece case, and stated: "It is the position of the Internal Revenue Service that Neece is wrongly decided. The RFPA exclusion contained in section 3413(c) provides that nothing in the RFPA prohibits `the disclosure of financial records in accordance with procedures authorized by Title 26.' Authorized procedures need not be contained within Title 26 itself; such procedures only need be authorized by Title 26, and would include regulations and Internal Revenue Manual Provisions. While section 7602 may not contain procedures, procedures may be adopted pursuant to the authority granted therein to examine books, papers, records or other data."

11. Please Comment on the Impact of the Mercantile Case on the Section 6672 Penalty against a Third Party.

Since litigation is still ongoing in the portion of the Mercantile case relating to section 3305, it is too soon to determine whether the IRS intends to appeal the section 6672 portion.

Undoubtedly, the IRS will continue to adhere to rulings such as Barnett v. Internal Revenue Service, 988 F.2d 1449 (5th Cir. 1993), which treats the question of "responsible person" as a question for the fact-finder. In Barnett, the Fifth Circuit reversed the district court and found Barnett to be a responsible person, notwithstanding his argument that he had no effective control over the finances of the company. The Barnett court observed: "We first observe that cases not finding [sections] 6672 responsibility are relatively few and far between." 988 F.2d at 1456. The Fifth Circuit found that Barnett had "substantial authority, even if not always exercised" and that was enough for a finding of 6672 responsibility.

12. Please Comment on How the Voluntary Compliance Resolution (VCR) Program Is Progressing.

The Voluntary Compliance Resolution (VCR) Program is a means by which pension plan administrators can voluntarily bring their plans into compliance without severe penalties. The program has been very successful nationwide with over 600 plans using the program. Here in Pittsburgh, we are not aware of any plan using this program. Normally, we would not readily have this information unless we happened upon it during an examination. This program is controlled and administered out of Employee Plans Division in Washington, D.C., and no specific feedback is provided to the districts.

13. Please Comment on IRS-Pittsburgh's Position (Pros/Cons) of Utilizing Other IRS Districts as "Support Audits" to Conduct Audits of a Taxpayer's Location Outside the Pittsburgh District.

The District uses support audits when that is the most efficient and effective means of examining the subsidiaries and/or divisions located in other districts. Consideration is given to the location of the taxpayer s staffing and records.

14. Employment Tax--

(a) What Is in the Future for Employment Tax Audits?

(b) How Successful, in Terms of Assessments Has this Been for Pittsburgh?

(c) What Issues Are Accounting for the Additional Assessments?

(a) We plan to maintain our employment tax presence as part of the team audit examination. In addition, we will continue our efforts in the employment tax area in non-CEP audits.

(b) The employment tax examinations have proven successful in relation to resources applied, revenue collected, and compliance achieved.

(c) Issues giving rise to employment tax assessments and compliance are:

* Meal Allowance - (Coordinated Issue)

* Reclassification of workers from independent contractors to employees. (Particularly former employees performing services for the company under an independent contractor classification. )

* Various fringe benefits, such as tuition payments, payments of professional fees by the company on behalf of employees, severance pay, etc.

15. Please Comment on Any Directives That May Have Been Given to Examiners on How to Handle Prospective Accounting Changes (Form 3115) Brought to the Examiner's Attention During the Course of the Audit. (Some Examiners Apparently Have Reacted Adversely to a Form 3115 Filing.)

We recently received guidance from our National office (more specifically from the National office specialist who is in charge of the Change of Accounting Method Issue) recommending procedures for processing the requests that are submitted to district directors.

Currently, all agents have been instructed to follow the procedures, terms, and conditions outlined in Revenue Procedure 92-20 that pertain to accounting changes. This includes the provision that applies to requests for a change in an accounting method while a taxpayer is under examination. The procedures will be re-emphasized at the revenue agents' continuing professional education classes scheduled for March 1995.

16. Please Comment on New Documentation Thresh-old Requirement (i.e., $250) for Charitable Contributions as They Affect Corporations, Especially in Cases Where It Is Obvious That No Goods or Services Are Received by the Corporation in Return for the Contribution.

The 1994 tax law change that requires qualified organizations to provide donors written acknowledgment for contributions (of $250 or more, or $75 or more when donation includes something of value to donor) is covered in section 170. It applies to business and individual taxpayers. Beginning in tax year 1994, you can claim a deduction for --

(1) contribution of $250 or more ONLY if you have a WRITTEN acknowledgment of the contribution from the qualified organization,

(2) contribution of $75 or more that is it partly for goods and services received from the qualified organization ONLY if the organization provides you with a WRITTEN good faith estimate of the value of the goods and services received. Only the amount over and above the stated value of the goods and services qualifies as a deduction.

In figuring whether your contribution is $250 or more, taxpayers do not combine separate contributions; however, two or more checks written on the same date to the same organization may be considered one contribution.

The acknowledgment must meet the following tests:

(1) It must be written.

(2) It must include: (a) the amount of cash contributed, (b) a description (but not the value) of any property contributed, (c) whether the qualified organization provided any goods or services as a result of your contribution, and (d) a description and good faith estimate of the value of any goods or services described in (c). (If the only benefit received was an intangible religious benefit that is generally not sold in commercial transactions outside the donative context, the acknowledgment must say so and does not need to describe or estimate the value of the benefit.)

(3) It must be obtained on or before the earlier of (a) the date the return is filed for the year the contribution is made, or (b) the due date, including extensions, for filing the return.

An organization is not required to provide a statement if it is of a governmental nature (refer to IRS Publication 526) or an organization formed only for religious benefit and the donor receives only intangible benefits, not sold in commercial transactions outside the donative context.

In addition, for contributions over $500 but not over $5000 your records must also include how you got the property, the date you got the property, the cost or other basis, etc. For contributions over $5000 of one property item or group of similar property items, you must have the acknowledgment and written records described above; in figuring if contribution is over $5000, you must combine claimed deductions for all similar items donated to any charitable organization during the year.

17. Comment on Policy of IRS Exam and the Taxpayer Stipulating the Facts on an Issue Prior to the IRS Contact with District or National Office Counsel.

IRS Examination feels strongly that there should be every attempt to reach agreement with the taxpayer on the facts in an issue before formal assistance (i.e., Field Service Advice) is requested of District Counsel or Chief Counsel's Office in Washington. There may be appropriate instances where informal advice and guidance is sought during the process of developing the facts or determining whether to raise an issue. Stipulation of facts at that point may not be possible or appropriate.

Appeals

1. Please Comment on the Early Referral Process and How Well it Is Working in Pittsburgh.

Our experience with these procedures is very limited. After public hearings held on January 28, 1994, the Appeals early referral program was launched via Announcement 94-41, as published on March 21, 1994. However, Appeals encountered an initial delay because the National Treasury Employees Union raised questions about the effect of the new procedures and wanted to negotiate over their implementation. These matters were fully resolved during June 1994 and the procedures are now in place in Pittsburgh and elsewhere.

Since the operating time frame has been so short, we have received only one case involving the early referral process in Pittsburgh. It is a recent referral and has not yet progressed to the point of scheduling a conference with the taxpayer. However, we did accept a large stand-alone issue in a TEFRA case during 1994 which-while not worked by Appeals as an early referral-demonstrates how the new procedure ought to operate under appropriate conditions. We fully resolved it within five months after receipt. Appeals and the taxpayer held four conferences over a two-month period. We believe that this was a very successful effort and expedited the closure of a large dollar issue.

Based upon our skeletal experience and optimism over the potential for success of these new procedures, we feel that this innovation will become an increasingly important aspect of our workload management in the future.

On a national level, there are about 16 early referral cases currently in Appeals.

2. Please Comment on the Recently Announced Mediation Process (Announcement 95-2).

As the announcement indicates, a public hearing will be held on February 23, 1995 in Washington, D.C. regarding the proposed mediation procedure currently under consideration in Appeals. It is planned as a one-year test of an optional. elective. non-binding process that will be limited to Coordinated Examination Program cases assigned to Appeals team chiefs. Mediation is intended to be used in factual issues, such as valuation, reasonable compensation, and transfer pricing questions.

At the present time, it s not clear what changes to the draft procedure will follow from the public hearing testimony--but we may assume based upon the early referral process hearing that further changes are likely. It is equally uncertain how many cases and what kinds of issues will eventually fall under the umbrella of the new mediation procedure. Experience will produce these answers.

Our commitment to mediation is quite easily explained. We see it as an extension of the regular Appeals alternative dispute resolution process. It has the potential to be useful under certain circumstances to facilitate settlement negotiations and enhance voluntary compliance. It's in that spirit that we welcome the opportunity to elect to use mediation when appropriate in our continuing effort to provide the best possible service to our customers--the taxpaying public.

Mediation, unlike arbitration, is non-binding and is particularly useful for certain large case issues that are highly factual, such as transfer pricing or valuation issues. Mediation facilitates communication. It will also enhance our services to taxpayers and tax practitioners by improving efficiency and reducing taxpayer burden.

A short period of time is usually required for the parties to reach an agreement to mediate an issue(s); one day is the norm, or two at the most for more complex cases. Currently, Appeals is exploring the possibility of using mediation in one large non-docketed case in the Western region.

In summary, mediation is cost-efficient, speedy, and flexible.

3. Coordination of Appeals with Competent Authority--How Is this Working?

Taxpayers can request referral of an issue from Examination or Appeals to the United States Competent Authority with simultaneous Appeals participation. The proposed procedures were published in Announcement 93-144. A public hearing was held January 28, 1994.

Final procedures for the simultaneous Appeals/Competent Authority procedures will be contained in a forth-coming Revenue Procedure, which will replace Rev. Proc. 91-23. Rev. Proc. 91-23 contains the general rules governing competent authority matters. The revised procedures will be published shortly.

4. Comment on Why and How Often Appeals Officers Are Brought to Pittsburgh from Other Districts/Regions.

The occasion involving the situation posed in the question generally deals with those large cases that are referred to the Pittsburgh Appeals Office that contain issues usually assigned to an Appeals team chief: They deal with a significant amount of tax at issue-generally $10 million or more. In addition, the cases have a significant number of issues to be handled, some of which are highly complex, and, consequently, appropriate case management practice requires the need to employ the team concept-using no less than two Appeals Officers assist the team chief.

In the past several years, the Pittsburgh Appeals Office employed an Appeals team chief. Since his retirement, the Regional Director of Appeals has determined that the number of team chief-type cases currently being transferred to Pittsburgh Appeals no longer warrants this position being retained as part of our local office's staffing pattern.

The current practice when a team chief-type case is assigned to our office is to notify the Assistant Regional Director of Appeals (Large Case). He will then determine which of the Region's team chiefs will be responsible for overall management of the case. As a general rule, all team members who will support the team chief should come from the Pittsburgh Appeals Office. The team chief determines how and to whom the issues are assigned and develops the plan to work the case.

Because our large case referrals have declined in recent years, we have had few situations where a team chief from another office in Mid-Atlantic Region has been brought to Pittsburgh to manage such a case. In those instances where this has happened, the large case has moved forward as it would have when we had a team chief on the Pittsburgh Appeals office staff.